Introduction

Mutual funds are a safe way to earn high returns. Unlike stocks, mutual funds are managed by professionals with many years of experience. All you need to do is browse the various available schemes, choose the best one, and park your money. Having said that, selecting the best mutual fund scheme might be challenging, especially because fund houses provide various schemes like growth, income, liquid, ELSS, Fund of Funds, etc. Moreover, selecting the right type (direct or regular) is also crucial.

So, scroll down to know how to invest in direct or regular mutual funds and which scheme will be the best for you. The following sections explain each mutual fund scheme in detail and provide you with some time-tested tips to earn high returns.

Regular or Direct - Where Should You Invest?

When you invest through a registered broker or mutual fund agent, you invest in a regular scheme. However, when you directly approach the Asset Management Company (AMC) or mutual fund house, you invest in the direct scheme.

The Net Asset Value or NAV of a direct mutual fund scheme is often higher than the regular scheme. As a fact, when you invest in a regular scheme, a part of your investment goes to the broker or agent. Hence, the mutual fund house may charge a higher expense ratio (the fee AMCs charge for maintaining your account) on regular mutual fund schemes.

Now that you know the differences between regular or direct mutual funds, keep reading to know how to invest in direct mutual funds.

The Types of Mutual Fund Schemes Available in India

The following are the most popular mutual fund schemes in India:

1. Growth - Investors with a long-term horizon invest in these schemes. Generally, growth funds are equity-based, meaning over 90% of your investment is used to buy stocks of various large, mid, or small-cap companies.

2. Liquid - Liquid schemes are best suited for people with a short investment horizon. Liquid funds invest in debt instruments like commercial papers or treasury bills. These funds have no lock-in period, meaning you can withdraw the full amount anytime you want.

3. ELSS - Equity-Linked Saving Scheme or ELSS is a popular choice for many investors willing to save taxes. Investing in ELSS makes you eligible to claim tax deductions of up to INR 1.5 lac under Section 80C. Moreover, your investment will remain locked for at least three years.

4. Income - Income funds generally invest in low-risk debt instruments like debentures or bonds. Investors investing in income funds get a regular income from the fund. Fund houses typically sell a pre-decided number of units every month or quarter and transfer the amount to the investor’s bank account.

5. Capital Protection – As suggested by the name, the primary aim of these schemes is to protect your capital. These funds invest in both equity and debt to ensure capital growth sans risks.

6. Fixed Maturity – Like a fixed deposit, these close-ended funds come with a maturity date. If you invest in these funds, your money will remain locked in until maturity. These funds usually invest in money market instruments and provide an indicative yield.

7. Pension – You can invest in these funds to generate a healthy retirement corpus. Like capital protection funds, these funds invest in a mix of equity and debt instruments to generate a steady capital growth minus risks.

8. Fund of Funds – These schemes buy units in other mutual fund schemes of the same or other mutual fund houses. If all schemes perform well, your fund value will increase, and vice versa. 

By now, you must have figured out how to invest in direct mutual funds and the different schemes you can choose. Let us now divert our attention to the three best tips you need to choose the best mutual fund scheme in 2021.

3 Tips to Choose The Best Mutual Fund Schemes

1. Investment Objective and Risk Tolerance Level 

Unlike fixed deposits, mutual funds can go either way. You need to evaluate your risk tolerance level first and investment objective next. 

For example, if you are a risk-averse investor, staying invested for an extended-term might be a better decision for you. Conservative estimates suggest that long-term investors rarely endure losses. However, if you do not mind taking risks, invest in aggressive equity funds. 

2. Investment Style

Some investors invest solely for capital growth. They set a financial goal and aspire to achieve it. However, some other investors invest because they want a regular income. 

If you want to invest in capital growth, choose the ‘Growth’ option. But, if you need an income, the ‘Dividend’ option will satisfy you more.

3. Expense Ratio and Entry or Exit Load

The expense ratio is the fee mutual fund houses charge for managing your money. The charge can be anywhere between 0.50% to 3%. Entry or exit load refers to the fee you have to pay while buying or selling units. As the expense ratio, the entry or exit load might be between 0.50% and 3%. However, some mutual fund schemes, especially liquid funds, do not levy any entry or exit load.

Hence, before choosing the best mutual fund scheme, evaluate its fee and load. A higher fee will result in lower-income. 

Invest Now Before The Market Changes Its Course

So, you know how to invest in direct mutual funds and ways to select the best schemes. It’s time to apply the knowledge you have acquired and invest to reap rich dividends. 

5paisa can be your go-to destination to get information about the best-performing mutual funds. You can compare funds, evaluate their performance, and invest within two minutes. 

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